Assume a Japanese firm invoices exports to the United States in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward.

Question

Assume a Japanese firm invoices exports to the United States in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward.​

Quizplus · Accepted Answer

CIf the Japanese firm expects the U.S. dollar to depreciate against the yen, it would want to hedge to avoid receiving fewer yen after the exchange rate change. Selling dollars forward would lock in the current exchange rate, protecting against depreciation. Conversely, if the firm expects the dollar to appreciate, hedging by selling yen (implicitly buying dollars forward) would allow it to benefit from the stronger future dollar.

Assume a Japanese Firm Invoices Exports to the United States